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Page added on February 26, 2016

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Depletion Policies for Oil-Exporting Developing Economies

Public Policy

In modelling the behaviour of oil-exporting countries it is usually assumed that the objective is to maximize the present value of oil revenues evaluated at a vector of market clearing prices. Given the various assumptions on the relevant parameters (initial reserves, demand etc) and the market structure, this exercise gives an extraction policy or, what amounts to the same thing, a vector of equilbrium prices . A substantial number of numerical exercise s have been produced along these lines. [PDF]

3 Comments on "Depletion Policies for Oil-Exporting Developing Economies"

  1. rockman on Sat, 27th Feb 2016 9:44 am 

    So the assumption is that oil exporters choose higher NPV over immediate cash flow. Thus thus model is f*cked up before it starts IMHO.LOL.

  2. Nony on Sat, 27th Feb 2016 12:34 pm 

    If you read the paper (which is from 1984!) instead of just dismissing it based on a snippet at a peak oil website, you would maybe make a more relevant criticism.

    The paper is actually discussing testing the concept. The main finding is that oil is developed SLOWER than one would expect from NPV. And the reason is because of immediate cash flow considerations. Flowing production IS pumped fast. (except for SA.) But they are reluctant to invest the money to develop their resources. IOW, they love flowing production, they hate CAPEX. (And on top of that, they are corrupt and are nationalization risks, so hard to entice partners.)

    BTW, this dynamic is still occurring even now. It’s one reason why Iran won’t come storming back to the market as fast as people think. It’s one reason why Venezuela is so screwed up. They got a goose laying golden eggs, but they don’t want to feed it. Cheap bastards.

  3. shortonoil on Sat, 27th Feb 2016 5:09 pm 

    Another ECON 101 analysis of why things aren’t working so well in the oil industry. We can put it with why their demand curve followed the supply curve for 150 years regardless of the price, or why a 70% decline in price has had almost no impact on demand. It is definitely worth the time and effort to absorb this erudite bastion of knowledge if one is already prone to cerebral fossilization!

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